foreign invesstors risk assessment in project financing for nam dinh bot power plant project

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IAE School of Business Administration

<small>THANG LONG UNIVERSITY </small>

INTERNSHIP REPORT ON

FOREIGN INVESTOR’S RISK ASSESSMENT IN PROJECT FINANCING

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ACKNOWLEDGEMENT

Firstly, I would like to thank my academic supervisor, Dr. Le Thanh Binh of Thang Long University, who is always willing to reply my questions about my research or writing. She has steered me in the right the direction and helped to see the main targets of the report, and I am gratefully indebted to her for her valuable instructions and comments on this report. Also, a special appreciation I would like to give to our Chief Representative, Mr. Park Hyang Soo, whose contribution in stimulating recommendations and encouragement, has helped me a lot during the internship period, especially in writing this report.

Besides, I would like to acknowledge with much appreciation the important role of all the staff of Hanoi Office and Korea Office of Taekwang Power Holdings Co., LTD, who gave the permission to use all necessary materials and data to complete my assigned task.

I would like to express my deepest gratitude to the Company management, who have invested their full effort in guiding the team in achieving the goal and who have provided me the possibility to complete this internship report.

Last but not least, I would like to acknowledge all the professors involved in this MBA course, from Thang Long University, University of Nice Sophia Antipolis, and other institutions for their lectures, knowledge and sharing of practical personal experiences.

Thank you!

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ABSTRACT

The internship report summarizes the work that I have performed during the internship period at TAEKWANG POWER HOLDINGS CO., LTD in Hanoi, Vietnam under the supervision of Mr. Park Hyang Soo – the Chief Representative of Hanoi Office and with the support from other Company staff.

The report firstly describes the overview about the company, its sector of activity, structure, organizational chart and some background information on the project the company is developing.

The report also details the tasks assigned to me during the internship period and my own strategy and plan to achieve the best output for reporting to the management. Besides, it highlights the application of the knowledge and skills I have acquired during the AMI MBA course in my internship.

The core section of the report represents the research and studies that I performed, especially PESTL, SWOT analysis to find out and analyze the factors which impose important impacts on the project. Based on such research, I describe the risks and suggest some mitigation measures that can be adopted by the investors.

The report concludes by pointing out the achievements, the shortcomings and the recommendations for further development of the subject and practical solution.

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3. Scope of business of the Company ... 4

4. Basic Financial Data of the Company ... 4

5. General Information on the Project... 5

6. Structure of the Project ... 6

7. Financing plan for the Project ... 8

CHAPTER 2. COMPANY STRUCTURE AND ORGANIZATION CHART ... 10

1. Organization Chart of the Company ... 10

2. Description of the Company Organization Structure ... 10

2.1. Board of Directors... 10

2.2. Chairman of the Board ... 11

2.3. Executive Managing Director ... 11

2.4. Functional Departments ... 11

2.5. Intern’s Position in the Company ... 13

CHAPTER 3. THE MISSION: ASSIGNED TASKS AND GOALS ... 13

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5.1. Fundamentals of Finance and Accounting and International Accounting ... 16

5.2. Financial Risk Management ... 16

5.3. International Financial Management ... 17

5.4. International Business Communication ... 17

5.5. International Contract Law ... 17

5.6. International and intercultural negotiation ... 17

5.7. International Economic and Globalization ... 18

2.1. Competition in the industry ... 24

2.2. Potential of new entrants into the industry ... 25

2.3. Power of suppliers... 25

2.4. Power of customers ... 26

2.5. Threat of substitutes ... 26

3. SWOT Analysis for the Project ... 26

4. Key risk considerations in Nam Dinh Project ... 27

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2. How Goals Are Reached ... 35

3. Shortcomings of the internship ... 36

4. Suggestions for the Company ... 36

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INTRODUCTION

Vietnam's power sector is very attractive to foreign investors. According to the Master plan of national electricity development in 2011-2020 (Power Master Plan VII), only 18 thermal power projects (out of 86 projects) are designated for foreign investors, but there is an increase in the number of foreign investors coming to Vietnam to propose to develop power projects in the form of Build-Operate-Transfer (BOT).

Vietnam's electricity demand is high while existing power plants cannot meet all the demand. To develop the new power plants as specified in Power Master Plan VII, lack of fund is still the biggest problem for the government of Vietnam and domestic investors. Therefore, foreign investors are heading into the electricity sector to capture the opportunities and to enjoy the incentive mechanisms given to foreign investors by the Vietnamese Government. It can be assumed that the potential for foreign investors in the power sector is substantial; however, the challenges are not less dominant. Risks for the foreign investors can be seen in every stage of the project development. Therefore, the critical factor for successful project development is the effective and proper allocation and management of risks among the stakeholders involved in the projects.

Taekwang Power Holdings Co., Ltd, a subsidiary of Korea’s Taekwang Group, is stepping the first steps into the power sector of Vietnam by developing a 2.2 billion USD coal-fired thermal power plant in Nam Dinh province in the northern delta of Vietnam. The project is in its initial stages with many uncertainties therefore, the company assigns its business development department to focus on risk assessment and mitigation. During my internship period, with the support of my supervisor and other senior staff of the company, I work on

<i>the subject “Foreign Investor’s risk assessment in project financing for Nam Dinh BOT Power Plant Project”. The report illustrates my work during the 4 month internship period </i>

with observations, analysis and suggestions.

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CHAPTER 1

COMPANY BACKGROUND 1. General Information

Company Name: Taekwang Power Holdings Co., Ltd Date of establishment: 9 July, 2008

Country of establishment: Hong Kong

Company type: Limited liability company

Scope of business: Power business and power plant project development

Registered address: Tower II, Admiralty Centre, 18 Harcourt Road, Admiralty, Hong Kong

Registered capital: 20 million USD

Korea office: 18^th Floor, Kukdong Building, 173 Toegyero, Junggu, Seoul, Korea

Vietnam Representative Office: Room 1101, HCO Building, 44B Ly Thuong Kiet Street, Hoan Kiem District, Hanoi, Vietnam

Contact Information: Tel: 02-6742-0700 Fax: 02-2274-6724 Local Contact Information: Tel: 84-43-9393-798

Fax: 84-43-9393-773 2. Company Background

Taekwang Power Holdings is a subsidiary of Taekwang Group (Republic of Korea). It was founded in 2008 as a new strategic arm of Taekwang Group to undertake development and operation of power projects.

Taekwang Group is a conglomerate which has been expanding its business portfolio from shoe manufacturing to fine chemical industry, leisure industry, real estate, and

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power electricity. With a view to become a global corporation, Taekwang Group is continuing to increase the investment in Asia including China, Vietnam, Indonesia and Malaysia.

Taekwang Group started it business in 1971 and currently owns over 20 subsidiaries in 6 countries over Asia with more than 63,000 employees. Taekwang Group’s total asset and total revenue reach approximately USD 3 billion in 2015.

The scope of business of Taekwang Group can be elaborated as below:

<i>Figure 1: Portfolio of Taekwang Group Footwear Manufacturing </i>

Taekwang is one of the Nike’s four key Original Equipment Manufacturer suppliers, accounting for 11% of the total production of Nike running shoes worldwide. Besides, it is also the leading fiber and man-made leather producer used for automobile, living industry material, sports shoes, industrial resources and materials.

<i>Fine Chemical </i>

Taekwang produces fine chemicals and operates the largest Nitric Acid production facility in Asia.

<i>Leisure Sports </i>

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Taekwang is now operating two golf courses in Korea and one golf course in Nhon Trach District, Dong Nai, Vietnam.

<i>Electricity </i>

Taekwang made a strategic movement of business diversification toward power business. Taekwang established Taekwang Power Holdings Company Ltd and acquired an experienced operation and management (O&M) company in Korea for its ambitious plan.

3. Scope of business of the Company

Realizing the strong growth of power plant investment over the next decades,

<i>Taekwang Group established Taekwang Power Holdings with an attempt to participate in power plant development, initially in Vietnam. Starting from the Nam Dinh Power Plant Project (the “Project”), Taekwang is now adding another chapter to its history to become a global independent power plant (IPP) development company. </i>

Taekwang Power Holdings is planning to expand to variety of fuel mix in power plant development including both green-field and brown-field projects targeting Southeast Asian power market including Vietnam, Indonesia, Philippines, and Myanmar.

Taekwang Power Holdings was awarded by Vietnam Government to develop the Nam Dinh Power Plant Project under the Build-Operate-Transfer mechanism and it has been making great efforts to develop the Project since 2009.

After several years entering the Vietnam market and realizing the potential of power business in Vietnam, Taekwang Group decided to expand Taekwang Power Holdings to pursue and seek for other business opportunities in power sector. The next target of the Company after successful development of Nam Dinh Power Plant Project will be renewable energy projects.

4. Basic Financial Data of the Company

Regarding financial data, as this company is established to develop the project so since the establishment date, it has not yet the revenue but only expenses. Based on audited financial reports of the Company in the previous 3 years, Loss for the year 2013 is 3,464,912 USD, loss for the year 2014 is 5,029,527 USD and loss for the year 2015 is 5,352,672 USD.

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When the company develops successfully the power plant project and the power plant is put into commercial operation (expected commercial operation date in 2022), the company will earn revenues from the sales of electric power to Vietnam Electricity Corporation (EVN).

5. General Information on the Project

The Company is established to develop the Nam Dinh Power Plant Project so it is also vital to understand thoroughly about the Project.

Investors : - Taekwang Power Holdings Co., Ltd - ACWA Power from Saudi Arabia Investment Type : BOT (Build-Operate-Transfer)

Commercial Operation Period : 25 years after COD Commercial Operation Date : Dec 2020

Total investment capital : 2.2 billion USD

Primary Fuel : Anthracite (Domestic Coal)

Location : Nam Dinh Province (90km from Hanoi)

<i>Figure 2: Air view of Nam Dinh Power Plant Project </i>

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6. Structure of the Project

The project structure including can be visually summarized to facilitate understanding as follows:

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The Nam Dinh Power Plant Project is a BOT (Build - Operate - Transfer) project. BOT scheme is a form of leasing, where the government allows a private company (project

<i>developer or sponsor) to finance, design, and construct an infrastructure facility (most </i>

common cases are road, bridge, power plant construction, etc.). In return, the project developer is permitted to collect earnings generated from the facility operation (in this case, electricity tariff) and operate the facility for a predetermined period (so called the concession period), which is 25 years as agreed between the investors and Vietnam government.

During the concession period, the sponsor owns and operates the facility, which would enable the sponsor recover all his costs and earn a reasonable profit. The revenues generated from the operation of the facility are intended to cover operating costs, maintenance costs, repayment of debt principal, financing costs (including interest of the debts and related fees), and a certain rate of return for the shareholders of the project company or sponsor. Therefore, the length of concession period would subject to agreement between the sponsor and the host government so as to fulfill two main objectives: to pay off the sponsor’s debts and to yield a reasonable profit for the sponsor.

When the concession period ends, the facility will be transferred to the host government. This scheme enables the host government to develop capital intensive projects with finance outside the state budget allocation, while the risks are transferred to the private entities.

A BOT project structure is very complex, as can be seen in the above illustration chart. It comprises multiple inter-dependent agreements involving various parties and participants. Financing for the project with Total Investment Capital of 2.2 billion USD comes from the owner’s equity (25%) and commercial loans from Lenders (75%).

<i>Loans from lenders are provided based on the Loan agreement between sponsors and </i>

lenders. Lenders’ credit assessment is based on the revenue generating capacity of the project, rather than the assets of the private companies and without involvement of the host government.

<i>The sponsor is two private companies binding in a Joint Development Agreement: </i>

Taekwang Power Holdings and ACWA Power. After getting the required permits and certificates from Vietnam Government, these two companies will together establish a

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company to run the project - BOT Company. Two sponsors will become the

<i>shareholders of the BOT Company under the Shareholder Agreement and top </i>

management positions of BOT Company will be exchanged in intervals between personnel from two sponsors.

<i>The BOT Company will enter into BOT Contract and Government Guarantee Undertakings with Vietnam Side Counterparties, i.e. Ministry of Industry and Trade on behalf of Vietnam Government, Power Purchase Agreement with Electricity of Vietnam, Coal Supply Agreement with Coal Supplier of Vietnam (Vinacomin), and Land Lease Agreement with the local authority (Nam Dinh Province People’s </i>

Committee) in Nam Dinh Province where the project site is located.

<i>On the other hand, the BOT Company will enter into the EPC Contract with EPC Contractor for the design, procurement and construction of the power plant and O&M Contract with an O&M Company (which could be the subsidiary of either sponsor). </i>

Notwithstanding this BOT project has such a complex and tight contractual framework, it is still associated with a lot of risks and uncertainties. Therefore, the critical factor for successful development of the Project is the effective and proper allocation and management of risks among the project counterparties, especially the host government, sponsor and lenders.

7. Financing plan for the Project

Taekwang and its co-investor are adopting “project financing” method to finance the Nam Dinh Thermal Power Plant BOT Project.

<i>a. What is Project Finance? </i>

Project Finance can be characterized in various ways and there is no universally adopted definition, thus, we can refer to the definition by The International Project Finance Association (IPFA) as follows:

<i>“Project finance¹ is the financing of long-term infrastructure or industrial projects and public services based on a non-recourse or limited recourse financial structure, where </i>

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A project financing is typically a highly leveraged transaction, in this project case, the debt/equity ratio is 75:25, which means sponsors can enjoy the advantage of lower initial equity injection, thereby making the project investment less risky.

The above mentioned features are the advantages of the project finance model and basically explain why sponsors of this Project accept to spend a lot of time and expenses pursuing this financing structure.

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CHAPTER 2

COMPANY STRUCTURE AND ORGANIZATION CHART

1. Organization Chart of the Company

<i>Figure 4: Organization Chart of Taekwang Power Holdings Co.,Ltd </i>

2. Description of the Company Organization Structure

The Company is a limited liability company incorporated under the laws of Hong Kong and domiciled in Hong Kong.

2.1. Board of Directors

The board of directors comprises two organizations (Huchems Fine Chemical Corporation; Taekwang Industrial Company Limited) and two individuals: Mr. Kim David Heeteck and Ms. Park So Hyun, who are Chairman of the Board and Executive Managing Director of the Company, respectively).

The Board of directors shall decide the annual business plan and development strategy of the company, decide development investment projects of the company, and decide the company’s organizational structure. The Board elects the chairperson of the Board

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of directors and decides the designation of, dismissal of, conclusion and termination of contracts with the directors and/or managers.

2.2. Chairman of the Board

The Chairman is elected by the Board of directors. His functions are preparing the agenda and operation plan of the Board of directors, convening and chairing meetings of the Board, signing and carrying out or organize supervision of implementation of Resolutions of the Board.

2.3. Executive Managing Director

The Executive Managing Director administers the everyday business operation of the company and is responsible to the Board for the performance of the Company, decides the issues related to the company’s everyday business operation, organizes the implementation of the company’s business plans and investment plans, sign contracts on behalf of the company, submits annual financial statements to the Board.

2.4. Functional Departments

There are 6 departments shaving their dedicated functions, managed by the Managing Director: (i) Management & Planning Department; (ii) Investment & Project Finance Department; (iii) Project Execution Planning Department; (iv) Project Development Department; (v) Legal Team and (vi) Representative Office in Hanoi.

Total employees in the company are 54 persons (48 are Korean and 6 are Vietnamese).  <i>The biggest department is Management & Planning Department with 18 </i>

employees; this department is in charge of planning, accounting, human resource management, and general affair including reporting to management of the company and Mother Company on day-to-day running.

 <i>Investment & Project Finance Department with 05 employees is in charge of </i>

project financing, handling all banking issues for the company and for the Nam Dinh Power Plant Project. As most of the project investment cost comes from bank loans, this department plays an important role in the project course. Specialists and experts in Investment & Project Finance department will assess the risks, analyze risks to the banks, demonstrate the bankability of the project and handle all communication and meetings between the investors and potential

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lenders. They are also in charge of seeking for other lenders all over the world to ensure the availability of fund for the project development.

 <i>Project Development Department has 15 staff, and plays the specific function of </i>

developing the Nam Dinh Power Plant Project in terms of legal and commercial aspects as well as searching for other investment opportunities in Korea, Vietnam and in other countries. The Nam Dinh Power Plant Project is a B-O-T Project so it involves a series of processes and procedures with the participation of Vietnam Government under the legislation and framework of Vietnam; consequently, developing this project requires a lot of time and efforts. The Project Development Department has been working vigorously for nearly 8 years in this project.

 <i>Project Execution and Planning Department has 5 employees; all of them are </i>

senior engineers with rich experiences in power plant construction and equipment. The Project Execution team is in charge of managing all engineering issues during the pre-feasibility and feasibility study design, and further, coordinating potential contractors of the Project. This team is quite small, as all engineering work is done by out-sourced consultants, both international consultants and Vietnamese consultants because the design for a thermal power plant is specialized and it requires to be done by a professional and certified engineering company. Not being an engineering company but managing a project which requires a demanding engineering expertise puts the technical team in a difficult and hard position. They need to understand everything, even beyond their major, in a professional way and strive to make everything technically consistent as there are always a lot of gaps between different consultants notwithstanding how well they can perform their work.

 Legal team has 2 members, both of them are lawyers and they are in charge of all legal issues related to the Company and to the Project.

 <i>Last but not least is the Representative Office in Hanoi with 7 employees. Hanoi </i>

Office is a liaison office with main function of supporting the functional departments in Korea as the Project development requires a lot of communication with Vietnam counterparties, Government authorities and State officials. Therefore, as a matter of fact, Taekwang needs some local persons at the Hanoi Office to fulfill this kind of communication work including translation and

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are Vietnamese, in which only one employer is Korean - Vietnamese translator and others communicate in English and perform specific function as directed by the respective company departments in head office in Korea.

2.5. Intern’s Position in the Company

My position in the company is business development assistant. I work directly under the Chief Representative in Hanoi and I would report to Chief Representative in Hanoi. My colleagues in Hanoi office have at least 5 years of experience working in foreign firms so all of them are very professional, punctual, dedicated to work and have good team working skills. The working environment is very open and encouraging; the seniors are always patiently listening to my questions. It is a valuable time for me to study and apply the theoretical knowledge of AMI MBA Course.

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<i>identifying, assessing the risks in project financing for Nam Dinh 1 BOT Power Plant Project and offering risk mitigation measures. This mission aims at compiling a </i>

synthetic report on risk assessment and mitigation to be submitted to the Board of Directors for purpose of an important negotiation meeting between the Company and some potential lenders in Korea and Japan.

The Manager of Project Development Department requests the working team to analyze all documents of the project since the beginning phase, to research as many materials as possible, to discuss with co-investors and other partners and relationships in banks and credit institutions to work out as many issues as possible. We are supposed to have internal discussions everyday or every two days to exchange ideas and step-by-step finalize the report for submission to our management. The working team for this mission consists of 5 members, with 3 members from the Korea office and 2 members from Hanoi office. Two local members shall support the Korean members and together perform all activities of the group task as mentioned above via tele-conference channel. I report my work to both the Manager of Project Development Department and Chief Representative of Hanoi Office, and for convenient and accurate assessment of my performance, the Chief Representative of Hanoi Office will be the main supervisor. During my 4-month internship, my action plan to accomplish the task given is as follows:

 June 1, 2016 to June 15, 2016: getting to know about the company and the Nam Dinh Project

 June 16, 2016 to June 30, 2016: studying the financing arrangement structure of the Project

 July 1, 2016 to August 31, 2016: develop my own risk assessment report,

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outcome, participate as supporting role in some other missions with other teams to get more experience and to know more about the Project progress, supporting the company’s work by translation of correspondences, documents or interpretation in meetings.

 September 1, 2016 to September 30, 2016: team meetings to finalize the team’s report based on individuals’ products, have the team leader submit and present it to the management, and attend the negotiation meetings between the Company and some commercial international banks.

For only 4 months, it is really hard work to have in-depth knowledge of a complicated Project like Nam Dinh BOT Thermal Power Project. Despite the disadvantage of not having deeply-routed acquaintances with Project issues, I have the advantage of being a local people so my point of view and analysis are always valued and noted by other team members and the management.

2. Link between Subject Matter and Mission

The subject matter and my mission during internship are directly linked. My outcome from the performing of the mission will be integrated into the Company’s report on Investor’s Risks in project financing for a Nam Dinh BOT Project in Vietnam.

3. Goals to Reach

During internship period, I need to attain the following goals:

 Understanding the Company structure, culture, plans and targets.

 Understanding the Project: its characteristics, scale, structure and progress.  Understanding the features of project financing.

 Understanding the lenders and the counterparties, partners and their expectations.

 Understanding the risks encountered by foreign investors when investing in Vietnam in general and in a BOT project in special.

 Envisaging the mitigation measures to comfort the lenders and co-investors.

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4. Contribution to the Company

With my knowledge and great effort, what I can bring to the Company can be summarized as below:

 Creating the linkage and facilitating communication between the Company and Vietnamese counterparties and partners.

 Explaining the Vietnamese culture, way of thinking and working method to Koreans, from the point of view of a local person.

 Collecting data and information about similar precedent projects in Vietnam.  Providing ideas, comments and contributions in accomplishing the mission

assigned to the Business Development Team. Namely, contributing to identify Investor’s Risks and envisage mitigation solutions in project financing for Nam Dinh BOT Project in Vietnam.

5. Theoretical Knowledge Put into Practice

Thanks to the valuable knowledge acquired during the Master AMI course, I can confidently participate in the Company’s operations and activities as well as successfully and efficiently complete my assigned task. All the course subjects bring me background knowledge a substantial impact on my task performance; however, I will list out some subjects that have the most effect on my internship work.

5.1. Fundamentals of Finance and Accounting and International Accounting

When I first join this MBA course, I do not have the financial background and my work is not related to the accounting or finance at all. These subjects have helped me to build confidence in reading and understanding financial data and information of a company and/or a project, to enhance my ability to put question and get involved in discussion regarding financial issues.

5.2. Financial Risk Management

This subject poses the most important impact in my internship mission as it is closely related with the task that I am given. It gives me the basic knowledge on risk management and mitigation measures. The professor also teaches us the way to figure out and envisage risks by very interesting case studies. With the acquired knowledge, I

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could identify and classify the foreign investor’s risks in the BOT projects in Vietnam, and suggest measures to mitigate them.

5.3. International Financial Management

The subject provides me with a deep understanding of financial management issues in a global environment, especially cross-border investment and financing decisions. The subject has helped me to understand financial tools that incorporate key international considerations into fundamental financial decisions. To be more specific, I can use the knowledge to look into and understand financial analysis performed by the Investment and Project Finance department, which helps to work out the financial risks and mitigation measures,

5.4. International Business Communication

International Business Communication brings a lot of practical knowledge that I can apply everyday when I come to office, such as how to communicate effectively in an international environment, how to behave in a professional way in businesses, how to adapt to corporate culture when joining a foreign company, how to solve the cross-cultural communication problems, etc. The knowledge and skills that I gained from this subject are very useful when I work in a Korean corporation.

5.5. International Contract Law

As the BOT Project that we are working on consists of multiple contract documents so this subject very useful to me when I study or have negotiation meetings with counterparties. From this subject, I learned how to identify an issue in a contractual context, how to solve it, how to argue over this issue when facing the counterparties in a professional way. In the future, when we move the next period of implementing the BOT contract and the other contracts, this subject will be more effective to my work. 5.6. International and intercultural negotiation

In the Project I am working for, there are a complex mix of cultures: Asia, Europe, Arabs, therefore, this subject helps me to understand how to solve problems and how to negotiate in an international and intercultural context, to know how to develop a business relationship across cultures, to understand how to work with individuals and

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groups with diverse backgrounds, and to become familiar with problem-solving or negotiation approaches from other cultures.

5.7. International Economic and Globalization

This subject gives me a lot of knowledge about macro-economy and globalization, global market and Vietnam market, trade policies, and tariff barriers which have great impact on the investment decisions to be made by foreign investors when they choose to invest in Vietnam.

5.8. International Strategy

The subject provides me fundamental tools to scan macro environment and micro environment pictures to predict threats and opportunities for an overseas project. It also brings me many beneficial understanding of the strategic steps a company needs to expedite before it enters into a new investment project, especially analysis tools such as PESTL, SWOT, Porter’s Five Forces.

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